Another profit upgrade for Qantas?
A report by Steve Creedy, Aviation writer in The Australian says that analysts are not ruling out another profit upgrade from Qantas after last week’s news that its pre-tax earnings would be 40 per cent higher than last year’s.
Despite a gloomy prediction from the International Air Transport Association that global airline profits will fall, many local analysts are tipping a bright short-to-medium-term future for Qantas.
ABN AMRO analysts David Cooke and Nick Berry, who have a buy recommendation on the airline, with a price target of $6.55, say Qantas should “comfortably achieve” its new pre-tax profit forecast.
“With load factors and revenue passenger kilometres continuing to track ahead of our expectations, a stronger than previously forecast (Australian dollar versus the US dollar) and continued cost control, we believe Qantas is well placed to exceed today’s strong growth guidance,” the analysts said in a note.
“While we remain cognisant of the medium-term impacts of additional low-cost-carrier competition and increased capacity, both domestically and to/from Australia, we believe Qantas’s operational ‘sweet spot’ should continue into FY09.”
Goldman Sachs JB Were analysts Paul Ryan and Alicia Chew have already been forecasting a 46 per cent rise in pre-tax profit and have a buy recommendation with a $7 price target.
The analysts said in a note that they remained comfortable with their guidance, based on strong demand and a tight supply dynamic.
They said a “bear case” that the carrier was on the top of its earnings cycle, with demand to weaken and supply to accelerate had its superficial attractions.
But this ignored the fact that the two-brand strategy was providing a strong competitive position and lifting group return on equity.
Fleet orders would also deliver a cost benefit – units costs were set to fall by at least 2 per cent as a result of the airline’s cost reduction program and the frequent flyer program would create value as it was relaunched and spun off.
“Airline multiples should contract as they approach peak cycle earnings,” the note said.
“But we believe Qantas’s multiple is yet to reflect a permanent step-up in its mid-cycle return on equity (now approximately 15 per cent versus historical average of 11 per cent).”
A dissenting view came from Deutsche Bank analyst Cameron McDonald, who agreed that the revised profit forecast was a short-term positive but expressed concern about the long-term capacity outlook.
Mr McDonald, who has a hold recommendation, with a $5.60 price target, said he believed capacity increases would put pressure on passenger volumes and yields.
He did not believe the airline’s group seat factor of 82.1 per cent was sustainable long term and predicted the high degree of capacity constraint currently in the market would ease over the next 12-to-18 months.
A Report by The Mole and The Australian
John Alwyn-Jones
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